Companies face the challenge of determining whether to issue debt or equity for financing needs. Issuance of debt or equity both have advantages and disadvantages.
Advantages of Issuing Debt
1. Issuance of debt has a tax benefit because of the debt tax shield. The interest payments to debt owners are expensed, causing a reduction taxable income. A company with a higher tax rate thus has a higher tax benefit from debt issuance
2. Some assert that debt adds discipline to management because interest expenses cause lower left over cashflows, which makes management more …